Myriad Genetics Inc (MYGN) 2013 Q1 法說會逐字稿

Welcome to the Myriad Genetics first quarter 2013 financial earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded Monday, November 5, 2012. I would now like to turn the conference over to Jim Evans, Chief Financial Officer. Please begin, sir.

Thank you, and good afternoon, everyone. Welcome to the Myriad Genetics first quarter fiscal year 2013 earnings call. During the call, we will review the financial results we've released today, after which we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at Myriad.com.

Presenting for Myriad today will be Pete Meldrum, President and Chief Executive Officer; and Mark Capone, President, Myriad Genetic Laboratories. Additionally, I will be giving an update on our financial results and future expectations.

This call can be heard live via webcast along with a slide presentation at Myriad.com. The call is being recorded and will be archived in the Investor section of our website.

Please note that some of the information presented here today may contain projections or other forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on Management's current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

With that, I'll now turn the call over to Pete.

Thank you, Jim.

Myriad delivered a very strong performance for the first quarter of the 2013 fiscal year. I am pleased to report that the total Company revenue increased 21% year-over-year to reach a new record of $133.4 million. While all of our tests contributed to this excellent performance, BRACAnalysis again demonstrated strong year-over-year growth of 17%, as the initiatives that we have put into place to further penetrate the Oncology and Women's Healthcare segments continued to progress.

COLARIS also contributed and showed impressive growth this quarter, as revenues from our colon cancer test grew 26% year-over-year. With the updated NCCN Guideline Recommendations, and quicker than expected insurance reimbursement, BART revenues increased 188% over the same period of the prior year. Myriad's other products contributed to our record revenue, with a 17% increase compared to the same quarter last year.

Both the Oncology and Women's Health segments performed well during the first fiscal quarter. However, the Women's Health segment was particularly impressive, with a 38% increase in revenue compared to the prior-year period. For the quarter, net income increased $30.1 million and diluted earnings per share grew 24% to $0.36.

Based on the strong first quarter financial performance, the accelerated growth in Women's Healthcare segment, and the quicker than expected BART reimbursement, I am pleased to announce that we have increased our guidance for fiscal 2013. We are now projecting revenue in fiscal 2013 to be $570 million to $585 million, which represents a 15% to 18% growth over the prior year. This level of revenue is expected to result in diluted earnings per share of $1.50 to $1.55 in fiscal 2013. Jim will discuss the Company's guidance in more detail later on in the call.

During our first fiscal quarter, we continued to execute on our strategic directives for long-term revenue growth and product diversification. Underlying this strategy is our commitment to improving patient care through the development and marketing of novel molecular diagnostic tests across multiple medical specialties. Our strategy is focused on reducing inefficiencies and costs in the healthcare system by providing physicians and patients with critical disease information to guide treatment decisions.

As a reminder, our three strategic directives are -- first, to grow our existing tests and markets; second, to expand our business internationally; and third, to launch new products, including companion diagnostic tests, across diverse set of medical disease indications. With the successful execution of these directives, we believe Myriad will be well-positioned for long-term revenue growth and diversification. Mark will provide an update on our first strategic directive, and I will focus the remainder of my comments on our international operations, our product pipeline, and our companion diagnostic efforts.

Our international expansion continues to progress well. We have significantly increased our sales, marketing, and clinical capabilities by adding an additional 10 individuals to the European team. The Company has also increased its international presence and now has agreements with 16 distributors in 30 different countries in Europe, South America, and Asia. Our Clinical Research Group has initiated nine clinical studies for PROLARIS in five European countries, as we move forward on the reimbursement front with our prostate cancer prognostic product. I am pleased with our progress in Europe and believe that the Company is on track for achieving over $50 million in international revenues by fiscal 2016.

Myriad continues to expand its presence in the companion diagnostic field. As we recently announced, our Homologous Recombination Deficiency Study was published in the British Journal of Cancer. This study analyzed ovarian tumor samples from 639 patients and demonstrated our ability to successfully identify which tumors had a DNA repair deficiency with a very high degree of accuracy. The P-value was 1 times 10 to the negative 44. This companion diagnostic candidate made improved patient care in the future by enabling physicians to identify those patients who would likely respond to the current DNA damaging agents, such as carboplatin and cisplatin, as well as new drug candidates under development, such as the PARP inhibitors. This study highlights Myriad's leadership position in companion diagnostics. We have entered into collaborations with five pharmaceutical companies with PARP inhibitor programs, including Abbott Pharmaceuticals, AstraZeneca, BioMarin, Cephalon, and most recently, Pharma Mar.

Additionally, the Company is pursuing clinical trials in platinum drugs. Myriad is co-sponsoring a Neoadjuvant Cisplatin Study with Dr. Nadine Tung of the Beth Israel Deaconess Medical Center, and Dr. Judy Garber of the Dana-Farber Cancer Institute. This prospective clinical study will investigate the use of BRACAnalysis as a companion diagnostic for Platinum use in breast cancer. Currently, Platinum drugs are not indicated for use in first-line breast cancer treatment although preliminary data has shown efficacy in BRCA- deficient patients. Enrollment of this study is expected to begin this month with sites at 10 major academic institutions. If this study is successful, it may be appropriate for every woman with breast cancer who is considering chemotherapy to have a BRACAnalysis test.

As you are aware, Myriad has one of the strongest and most diverse pipelines in the industry, across six major medical specialties. This pipeline encompasses Oncology diagnostic products for lung cancer, bladder cancer, and melanoma, as well as neuroscience products that differentiate patients with major depression from those with bipolar disease, and may identify patients with mild cognitive impairment that are likely to advance to Alzheimer's Disease.

One of our nearest-term commercial product launches is MELAPATH, a molecular diagnostic test to assist pathologists in determining whether a skin biopsy is benign or malignant. Each year, there are more new cases of skin cancer than the incidence of breast, prostate, colon, and lung cancer combined, and the incorrect diagnosis of melanoma is a major cause of medical malpractice lawsuits. This test will focus on approximately 275,000 skin biopsies, which are too uncertain for a pathologist to make an assessment as to their malignant status. Myriad's MELAPATH test, which is a molecular assay that addresses this critical unmet medical need, has achieved a 95% concordance in predicting which suspicious skin lesions are malignant.

Myriad expects to launch MELAPATH in calendar 2013. In preparation for MELAPATH's commercial launch, we will be hiring a national sales manager and six account executives to call on high-prescribing dermatopathologists in California, Texas, Florida, the Northeast, Mid-Atlantic, and Midwest regions. This sales force expansion will take place in the second half of this fiscal year. The market opportunity for MELAPATH in the United States is $400 million annually, based on an anticipated average selling price of $1,500.

In summary, we continue to make excellent progress on the goals set forth and our strategic plan to diversify across multiple disease indications and grow revenues both domestically and abroad. We are pleased with the strong performance in our first quarter and believe that we are well positioned for growth in fiscal 2013 and beyond.

Now, it is my pleasure to turn the call over to Mark Capone.

Thanks, Pete.

I am pleased to provide an update on our strategic directive to grow existing products in our existing markets. Specifically, I will provide commentary on the execution of our strategic initiatives in our Oncology and Women's Health segments, recent progress on our reimbursement for BART, and an update on the PROLARIS launch.

To begin, our Oncology segment grew 16% year-over-year in the first fiscal quarter. With the BRACAnalysis market less than 50% penetrated and the COLARIS market at an earlier stage of development, we continue to believe that significant growth opportunities remain in this segment. The growth was driven by three main initiatives -- new indications; expansion of the patient-specific specialty sales force; and the initiation of protocol integration programs. First, we continue to increase penetration in our newer BRACAnalysis indications for triple-negative breast cancer, ovarian cancer, and carcinoma in situ. These three indications in total were responsible for approximately half of the BRACAnalysis growth in the first quarter.

In addition, in the first quarter, we saw the continued benefit of splitting our Oncology sales team into two patient-specific teams -- a breast cancer specialist team and a colon cancer specialist team. Last fiscal year, we launched the pilot project and were pleased to see that in this quarter, the year-over-year growth rate for those teams significantly exceeded the national average. The breast cancer specialist team saw 22% year-over-year increase in revenue, while the colon cancer specialist team saw almost a doubling of sales. To accelerate this impact, we have now completed the expansion of two additional specialty teams. Our total Oncology sales team now includes 25 breast cancer specialists, 25 colon cancer specialists, and 110 generalists selling all cancer products.

Our last Oncology initiative includes replicating the success we have seen in our Women's Health segment with the protocol integration program. This initiative focuses on the development of systematic processes to ensure all appropriate patients are identified in the physician office. The goal is to establish 600 of these protocol integration programs in Oncology in this fiscal year, and I'm pleased to report that we have already initiated 203 in the first quarter. We would expect the results of these programs to materialize in the next few quarters.

Our Women's Health segment showed outstanding growth in the first fiscal quarter. The 38% increase over the same quarter of the prior year represents an acceleration of the 32% growth rate we experienced in the fourth quarter of fiscal 2012. We attribute this acceleration to excellent execution by the Women's Health team on their four key initiatives -- territory additions, protocol integration, expansion into imaging centers, and interactive media campaigns.

The first initiative is continued territory expansion to reach more OB/GYNs. In fiscal 2012, we added 15 additional Women's Health sales territories. These territories were responsible for about a quarter of the revenue growth in the first quarter. This quarter, we completed the addition of another 11 new territories, bringing the total Women's Health team to approximately 200 sales professionals.

The second initiative focuses on protocol integration programs. As mentioned last quarter, the Women's Health team pioneered the protocol integration program in fiscal 2012, and implemented 600 programs in various physician practices. As a result, these programs were the most significant driver of Women's Health revenue growth in the first fiscal quarter. The goal for Women's Health is to conduct 900 additional protocol integrations in fiscal 2013, and the team has successfully completed 238 in the first quarter.

The third initiative involves increasing penetration in breast imaging centers. These centers perform mammograms and MRIs for large numbers of women, many of which are at high risk for breast cancer. The Women's Health team has targeted a select number of progressive imaging centers and has implemented protocol integration programs in these practices. This initiative is important because it allows Myriad to access women outside of our current physician reach. In the first quarter, we saw over 100% increase in revenue from radiology centers.

The last initiative continues our efforts to drive physician and patient demand through interactive media efforts. Overall, these efforts led to a 33% increase in website traffic in the first quarter. Current efforts are focused on increasing the conversion rate of these site visits through a newly launched hereditary cancer quiz. The objective is to have patients take this online quiz to identify hereditary cancer red flags and to use this output in a conversation with their physicians. Our goal is to have over 50,000 patients take this quiz in fiscal 2013, with an expectation that up to 10% of these patients will have discussions with their physicians about hereditary cancer testing.

We have also made significant progress this quarter with our payer groups. Last quarter, we highlighted the opportunity with our BRACAnalysis Rearrangement Test, BART, which was recently recommended by NCCN for all hereditary breast and ovarian cancer patients. During the quarter, we announced the decision by a local Medicare contractor, Noridian, to cover BART for all patients that are eligible for BRACAnalysis testing. As a result of this coverage decision, and similar decisions by a number of private insurance companies, BART testing was provided for approximately 35% of BRACAnalysis patients in the first quarter. As a number of major providers are considering coverage, we anticipate that BART will be covered for over 50% of patients by the end of the second quarter. As a result, we are shifting our standard offering to integrated BRACAnalysis, which will include BART, as well as sequencing for the BRCA1 and 2 genes. We will continue to work with the remaining payers to reimburse this integrated test.

On Thursday of last week, CMS issued its determination that Tier 1 and Tier 2 molecular pathology codes, including those for BRACAnalysis and COLARIS, will be placed on the clinical laboratory fee schedule, the decision we support, given the lack of physician interpretation of our tests. CMS previously announced its intention to price all codes placed on the clinical lab schedule, using the gap-fill methodology. Historically, gap-filling has focused on reimbursement amounts from other payers.

For BRACAnalysis, the average reimbursement level of private payers and Medicaid is approximately $3,140, and the Medicare reimbursement price is $3,340. The reimbursement range across all payers is very tight, which is certainly positive for Myriad. We will immediately begin to work with Noridian, Myriad's Medicare Administrative Contractor, to arrive at a price under the gap-fill methodology. This preliminary reimbursement amount will be made public in April, 2013, and will be followed by a period for public comment. The final pricing should be publicly announced in September, 2013.

It is important to note that none of Myriad's commercial insurance contracts are tied to or based on Medicare pricing. Further, Medicare accounts were less than 10% of Myriad's overall business. In addition, on the reimbursement front, we are pleased to announce that BRACAnalysis will be reimbursed by TRICARE as one of the Oncology Molecular Diagnostic Demonstration Projects. TRICARE covers approximately 2% of the women in the United States serving in our Armed Forces. This demonstration project was initiated at the beginning of our second fiscal quarter.

Lastly, I would like to provide a brief update on our commercialization efforts for PROLARIS. In September, Noridian announced its preliminary intention to list PROLARIS as a non-covered service, pending additional comments regarding clinical utility. The non-coverage decision was not unexpected and is a typical step in the standard process for obtaining approval for a novel test. Additionally, it will not impact our estimated 18- to 24-month timeline for reimbursement. In our discussions with Noridian, the questions have not been focused on either the accuracy of the test or its clinical validity, but exclusively on whether a physician will change their treatment decisions. Noridian has asked for additional information on how physicians will use the test to modify medical management decisions, and we are providing data and comments from the hundreds of physicians that have used PROLARIS in the past six months.

Although Medicare remains the most important payer for PROLARIS, we have made progress with private payers. We have successfully established pricing for a total of 90 million covered lives and are working to finalize reimbursement by establishing medical policy with these same payers.

We also continue to make significant progress on clinical studies. PRO 004, a 413-patient post-prostatectomy study completed with UCSF, is in the final review for publication. And we have successfully completed PRO 005, 006, 008, 009, while PRO 007 is about 50% completed. In total, these studies represent over 3,000 patients evaluated with PROLARIS. In addition, a number of other studies in the US and Europe are underway, which will further substantiate the value of PROLARIS.

In summary, we are pleased with our successful execution in the first quarter of fiscal 2013 and believe that we are focused on the right strategic initiatives to drive continued growth throughout the rest of the year.

I would like to now turn the call over to Jim.

Thank you, Mark.

It is my pleasure to present a more detailed look of Myriad's financial results for the first quarter of fiscal 2013. Diving into Myriad's revenues for the first fiscal quarter. [December] quarter is a seasonally weak quarter for Myriad, so we were pleased with the record revenue of $133.4 million. This revenue is comprised of molecular diagnostic revenue of $127.3 million, which grew 22% year-over-year and companion diagnostics services revenue of $6.2 million. The increase in molecular diagnostic revenue was driven by increased patient demand and sample volumes of our existing tests and the strong initial demand for BART.

A breakdown of revenue by product reveals a BRACAnalysis provided revenue about $105 million, COLARIS and COLARIS AP contributed $12.1 million, and BART added $7.6 million. Myriad's other tests accounted for $2.6 million of revenue. During the month of October, we continued to see strong demand for our products.

Turning to Myriad's operating expenses, this quarter research and development expense increased to $11.4 million, an increase of 34% as compared to the same quarter of last year. This increased R&D expense was associated with the further development of our diagnostic product pipeline, such as MELAPATH and the Lung Cancer Prognosis Test, as well as support for our nine commercialized products.

Myriad currently has 57 clinical studies ongoing and four research papers submitted for publication and progressing through the peer review process. With the recent launch of PROLARIS in both pre- and post-prostatectomy settings, the upcoming launch of MELAPATH, and the exciting progress in HRD, we are confident that this investment will help drive future growth.

First quarter SG&A expense was $56.1 million, as compared to $46.1 million in the same period of last year. The 22% increase in SG&A was primarily to support the 21% increase in revenue. At this time last year, Myriad had a sales force of 360 representatives. As we have detailed in our comments today, Myriad currently employs a domestic and international sales force of 390 representatives. We anticipate modest growth to these numbers during the remainder of the fiscal year, as we look to fill out our international sales team and as we build the MELAPATH expeditionary sales force. Other drivers of the SG&A increase include -- increased commissions associated with higher revenue; additional investments in our European operations; SG&A costs from Myriad RBM; and a modest increase in bad debt expense versus the prior year.

Operating income for the quarter was up 17% to $48.6 million compared to $41.5 million in the first quarter of the prior year, with operating margins coming in at 36.4%, or 80 basis points higher than the June 2012 quarter. The first quarter effective tax rate was 39.5% as compared to 40% in the same period of the prior year. During the quarter, we experienced tax benefits from a number of stock option exercises, which helped reduce Myriad's effective tax rate. We continue to anticipate the effective rate for the fiscal year to come in at approximately 40%.

Diluted weighted average shares outstanding were 83.9 million shares, and during the first quarter, we bought back approximately $40 million, or 1.8 million shares of our common stock. As of the end of the first fiscal quarter, Myriad had 53.5 million remaining under our current stock buyback authorization. Diluted earnings per share grew in the first quarter by 24% to equal $0.36.

Moving on to the balance sheet and cash flow, we ended the first quarter of fiscal 2013 with $466 million in cash and investments. This compares to $402 million at September 30, 2011. During that same 12 months, Myriad repurchased $137 million of its common stock, and still saw its cash balance increase by 16%. Cash from operating activities equalled $51.4 million during the fiscal 2013 first quarter, and capital expenditures were $2.5 million.

Through the first fiscal quarter, we were very pleased with the trends that we have seen and [sample flows] and demand for our tests. That, in combination with the reimbursement decisions for BART and for TRICARE, have resulted in significantly improved expectations for fiscal 2013. As Pete mentioned, revenue is now expected to grow 15% to 18%, to a range of $570 million to $585 million. Our original guidance had been $550 million to $565 million, or an 11% to 14% increase. Specifically, molecular diagnostic revenue is now expected to be $545 million to $557 million. Companion diagnostic revenue guidance of $25 million to $28 million remains unchanged. Earnings per diluted share guidance is now $1.50 to $1.55, up from our original guidance of $1.44 to $1.48. The new EPS guidance represents growth in the range of 15% to 19% versus the original EPS growth of 11% to 14%.

Other items to be taken into consideration with this updated guidance include -- BART has not reached the level of optimization and efficiencies to scale that BRAC and COLARIS have achieved in our lab; therefore, puts slight pressure on our gross margins as BART sales levels increase in the future. I don't see the impact being greater than a single percentage point. We will continue to make investments in research and development, with the expectations that R&D expense for the full fiscal year will be approximately 9% of total revenue.

In addition to our new sales reps, SG&A will also be impacted by a need for additional customer service and billing representatives to meet the BART demand, as well as by increased sales and marketing efforts to support the launches of PROLARIS and MELAPATH. The fiscal 2013 tax rate is still expected to be approximately 40%. Our EPS guidance takes into account the impact of stock buybacks completed to date, but does not factor in the impact of any future buybacks. The timing and size of future buybacks will continue to be opportunistic and dependent on market conditions.

Finally, we have not been able to fully determine the impact of Sandy on our customers in the Northeast and the potential impact to our revenues from that region.

With that, it will be our pleasure to answer any questions you may have. In order to ensure broad participation in today's Q&A session, please limit your questions to one, plus a related follow-up, and then jump back into the queue.

Operator, we are now ready for the Q&A portion of the call.

Bill Quirk from Piper Jaffray.

Good afternoon, everybody, and nice quarter.

Thank you.

First question, just thinking about the, Mark, I think you mentioned during your prepared comments, in terms of starting to combine BART plus BRACAnalysis, can you elaborate on that a little bit? I assume you're going to continue to price those differently and could you speak to that in the context of obviously working with Noridian to talk about, obviously trying to do a gap-fill for [one] test? Some additional color there would be great. Thank you.

Sure. Thanks, Bill. So historically, if a customer wanted to order BART, they would, on our test request form, they would check a comprehensive BRACAnalysis box and then they would write in that they were also interested in the BART test on a patient. So they were two distinct ordering points on our test request form. We will be rolling out a new test request form that now integrates those two. In fact that will be the exact title on the test request form, which would be integrated BRACAnalysis, which will then get a physician both the sequencing products and the large rearrangement of tests as well. So that will become our de facto product. As I mentioned, we anticipate over 50% of patients will have BART reimbursed this quarter. So as that now becomes the majority of our tests, we think for our customers, it will be a lot easier to be able to order the integrated product. You're right.

These are -- they do have separate list prices, but the BRACAnalysis, comprehensive BRACAnalysis is a [$3,340] list price. BART is a $700 list price. And they will continue to be billed as separate codes because in the new molecular pathology coding, they are identified as separate tests, and so they will be billed separately. In our discussions with Noridian, as we go through the gap-filling process, each of those codes, as well as all the other codes that Myriad has in addition to the others, will all be priced separately in the Noridian discussions. So we will be gap-filling each of those in a separate process. The last thing I will add is that historically, we have seen about an 8% discount off of list prices for comprehensive BRACAnalysis. We expect for BART that we will see a higher discount off of list price and I think we will provide more clarity on that as we continue to get reimbursement from more payors in the future.

That's great color, guys. I appreciate that. If I could sneak in just two quick housekeeping questions, one is just a quick comment, Jim, on what the O-US revenue was in the quarter given that you're building out your team there. And then just secondly, to the extent you can give us any comparison on BART, what it was, say, last quarter and then perhaps if you're feeling generous, fill in the other couple of quarters outside of the first from last year. Thanks.

Well, we are receiving samples and reporting our results from our European operations. It's still very early on in its development. We are really getting into the meat of building out our sales and marketing capabilities. But revenues from Europe continue to be very modest. But we do feel we are on pace to meet our goal of over $50 million in European revenues by fiscal 2016. As far as the BART break-out of additional information from past quarters, I don't have that in front of me. I can tell you that a year ago, it was $2.6 million versus the $7.6 million that we did this year, but I don't have information in front of me for those other quarters.

Derik de Bruin with Bank of America.

Sorry. I'm out of the office today for a little bit. So the -- I was just curious. When can we expect to see results from the PROLARIS Phase IV study?

So we have completed that. It's in the process of being submitted to journals for publication. It's always hard to predict how long that process takes. Typically, we see anything from six to nine months to ultimately end up with a publication, but the study has been completed. We've seen what we expected to see, which was a look at the distribution of PROLARIS scores across a contemporary set of patients here in the United States.

Okay. How should we think about the run rate of the BART? Is 7 -- is it the number we saw this quarter relative, accelerating that over the next couple of quarters, the way to think about that?

Yes, I would think as Mark detailed out, we, as more patients get reimbursement, as we get more reimbursement covering additional patients, we should see that BART number continue to grow as the year progresses.

Isaac Ro from Goldman Sachs.

I just want to ask on the BART impact you mentioned on margins, can you clarify what you said there? I think you said 100 basis points or less; it that the gross margin level, number one? And number two, is that for the year?

Yes, it is on the gross margin level. We think at the maximum impact would be 1%. It really depends on how fast it ramps up. Currently, it doesn't have the same margins as the tests, BRACAnalysis [clearly] enjoy and so there would be a modest impact on our gross margins as we get up to scale on the BART Test. I think, we saw a minimal impact on gross margins in this first quarter. I would think by the end of the year, you might see that type of impact on an individual quarter. I'm not sure if we would see it build all the way through for the year's gross margins.

Okay. That's helpful. And then secondly, just on the hurricanes, I know you guys are still assessing it. But maybe could you give us, qualitatively speaking, some framework, as to think about, what are the puts and takes there? What are the logistical issues that you are considering there? Whatever color you can provide there would be helpful.

Sure. Thanks, Isaac. Yes, and first, just our thoughts and prayers are with everybody out in the Northeast. I'm pleased to say that all of our Myriad employees are safe, although some are still inconvenienced with power outages, but at least everybody is safe after Sandy. As you mentioned, we are still assessing that. We will see some short-term impact from Sandy on our sample volumes, but I think it's always difficult to tell how that will translate because as many patients will reschedule those visits that they missed with physicians later on in this quarter, it's difficult to say exactly how that will translate into sample volume. That being said, we have tracked that very closely over the last week. As we reviewed our revised guidance for the rest of this year, we took into consideration any of the things that we may have seen from Sandy. We still feel very comfortable with the guidance that has been revised and we've discussed on the call.

Doug Schenkel from Cowen & Company.

You indicated that you expect 50% of [BRCA] patients to have coverage for BART in fiscal Q2 and this is, you've pointed this out in the context of talking about now selling or [you guys] basically having the default product being integrated BRACAnalysis? With that in mind, what are you, what percentage of patients do you expect to have the integrated BRACAnalysis products run on? I guess in the context of what your model, what you're incorporating into full-year guidance?

Yes, I think -- thanks, Doug. As I mentioned in my prepared comments, we saw 35% in the first quarter. In the second quarter, we're anticipating over 50% will end up having BART reimbursed with BRACAnalysis, which is why we're shifting to the integrated product on our test request form for the second half of the year.

As far as the actual percentage above that, it's a little difficult to say at this point, as we're still in discussions with all of our payors. We have, as we anticipated guidance, we have taken into consideration that 50% that we see here in the second quarter and expect that obviously to continue to continue through the rest of this year. We do think in the cases where BART is not being reimbursed, generally, it's unlikely that a patient would necessarily pay those costs out of pocket. And so for the most part, our expectations around BART are really consistent with the level of reimbursement that payors are providing, since out-of-pocket costs, generally, patients have shied away from those. We'll provide some additional color on the next call on where we are above 50%, but at least for now, that's our current status.

Okay. Thanks for that. One, I guess unrelated follow-up, and I apologize if I missed this in your prepared remarks, R&D as a percentage of sales in the quarter was a little bit lower than we expected. This may just be a function of the revenue beat. But, again, you guided to, guided R&D expense to 9% of sales for the full year. I'm just curious, were there any R&D expenses that shifted out of Q1 into subsequent quarters just for timing reasons?

Yes, that's something that we do see as we have our research and development expenses come through, that it is a little bit lumpy. It all depends on when samples are received, when we are able to enter into additional clinical studies and how they progress. So it is a lumpy number. We do still anticipate having through the full-year R&D come in at about that 9% of revenues. As revenues have come in higher than what we had originally anticipated for the quarter, we are looking at other research and development projects that make sense to be funded. So that is something I would think we will catch back up to in the coming quarters.

Scott Gleason with Stephens.

Congratulations on a good quarter. I guess first off, Pete, you mentioned MELAPATH is a new product that you guys are going to be launching here in the second half of the year. Can you talk a little bit about your strategy from a clinical validation standpoint, reimbursement standpoint? I guess when we think about expenses, the sales force, can you give us an idea of how large that's going to be?

Yes. The MELAPATH product is going to be marketed primarily to dermatopathologists. As I mentioned, we'll have initial sales force of one national sales manager and six sales reps. We'll continue to expand that as MELAPATH begins to show progress and take off. It's hard to project right now, but it's a fairly concentrated physician market. So it's not going to be a huge sales force, but probably something in line with our Urology sales force for PROLARIS. We are working at the present time in terms of preparing groundwork for getting reimbursement for MELAPATH, and we feel very comfortable with the clinical utility and the value it offers.

In terms of being able to identify in so many of these patients, almost 300,000, where they can't identify whether it's a malignant or benign [nevi], that this is very critical information in the treatment of those patients. So we're optimistic about reimbursement coverage. Until we get reimbursement coverage, like with all of our products, we don't anticipate significant sales ramp. So we really are focused right now on getting professional cited guidelines in place and insurance reimbursement.

Great. Thanks. And then just one other quick question, I guess when we look at BART tests, you guys mentioned that you're getting a larger discount to list price. I guess can you give us any idea of where you're getting paid today, where we think about the model going forward?

Thanks, Scott, so, when you say where we're getting paid, are you referring to specific insurers, or --

No, average reimbursement dollar amount.

Right. Yes, I think as I mentioned, we are discounting more than we would have traditionally on BART. It's probably a little premature to talk about ASP, just because we still have quite a few insurance companies to ultimately contract with. So while I say the discount is higher than our traditional 8%, it's still, there's still pretty attractive reimbursement levels to where we are today. I think on our next call, we'll probably be in better position to provide a little more accurate ASP on a go-forward basis.

Jon Wood from Jefferies.

So either Mark or Pete, just another BART one, sorry. If you guys have projected up to 50% in the second quarter and then you've leveled it out in the back half of the year at 50%, did I understand that correctly?

Well, what we have said is we expect in excess of 50% this quarter and we -- our guidance presumes that, that type of reimbursement level will continue throughout the second half.

Again, it's totally dependent upon our ability to negotiate with some of the remainder of the insurance companies that don't yet cover BART, and that's hard to project at this time. So we're forecasting maintaining at 50%, but we're certainly going to try to expand that in the third and fourth quarters.

All right. Understood. And so that would give me something about $45 million of revenue in 2013, is that about right, Jim, from a modeling perspective?

It's difficult to say, as Pete said, exactly where that's going to come in. That's probably not too far out of the ballpark of what we were expecting in our models.

Okay, great. And then one last one. Just if you look at the Oncology versus the Women's Health segments, can you help with -- what percent of BART is going into each of those buckets? I guess what I'm looking for is, is BART skewed more heavily to either one of those from a contribution perspective?

No, it's pretty consistent, Jon, across both in proportion to the number of comprehensive BRACAnalysis that are ordered. So we don't see, the ratio of BART to comp BRAC nearly is the same in both of the segments. We don't really see a material difference.

Michael Yee from RBC Capital Markets.

Sorry to ask another BART question, but trying to do the back of the envelope math, and you said you had about $7.5 million this quarter and $2.5 million or so last year. This is a little more than a doubling. If you're saying there's 35% of coverage of BRAC Testing was now covered by BART, can you just tie together that math? Did all 35% of BRAC patients actually get billed and booked for BART, or is it a percent of the 35% that's covered? Help me explain and walk through that math there. How many tests, let's say, how many tests were actually done for BART this quarter?

Sure. Thanks, Michael. So the 35% is of the patients that got comprehensive BRACAnalysis test results, 35% of those patients also got BART results. So that's where that $7.6 million comes from, are those 35% of the comprehensive BRAC patients that also got BART Testing.

So you think that 50% of them would be getting comprehensive testing and now getting BART? And that's -- because I'm not tying up the numbers right. Maybe you can tell me how many actually got tested, and how many tests and then versus last year?

Yes, I don't actually have number of tests in front of me. We can, and maybe this is something we can even talk about in some other detail. What we were saying is for the second quarter, we would expect in excess of 50% of the patients that had comprehensive BRACAnalysis Test results. We would expect in excess of 50% of those to also receive a BART Test for the second quarter. So we have mentioned that average list price for comprehensive BRACAnalysis is $31,40 for the private payors, $3,340 for Medicare, so you can get some sense of volume of comprehensive BRACAnalysis Tests. And then 35% of that for Q1, 50% of that for Q2 will give you some idea on the number of tests for BART.

(Operator Instructions)

Amanda Murphy from William Blair.

I had a follow-up from a previous question on the two different segments, Oncology and Women's Health. So if you strip out BART at this point, obviously that's flowing through but how are you guys thinking about the underlying growth rate for those two businesses at this point and as you think about the next year or so?

Thanks, Amanda. If you take out the impact, as Jim mentioned, there was year-over, about a $5 million revenue impact so that equates to roughly 4% of that 21% growth. So where you could back that out and look at organic growth in the absence of those BART revenues, I think you're still looking at what we would consider to be a very healthy growth in both the Oncology segment, which grew at 16% inclusive of BART, and the Women's Health segment, which grew 38% inclusive of BART. So both of those segments backing out the BART impact, we still saw some very nice growth rate, in particular, I think on the Women's Health segment, which continues to see accelerating year-over-year growth rates.

And you think that's reasonably sustainable?

Well, I think we always come back to what is the untapped market potential for Women's Health? We know we're less than 10% penetrated in that market. So there's still significant untapped potential. We think we have a very good idea what's driving the growth in that marketplace and those are the strategic initiatives that we went through. But we continue to think there's good opportunity for growth in that segment and in the Oncology segment, same thing. We know the growth drivers. We're focused on executing those three growth drivers so being less than 50% penetrated in Oncology, there's still opportunity for growth in that market, so --.

Amanda, I think if you look at revised upward guidance of 15% to 18%, we have confidence for continued growth in both the Oncology and the Women's Health segments.

And how are you guys thinking about potential pricing coming out of Noridian in terms of your guidance at this point?

Well, right now, we're not expecting any cuts to our current level of reimbursement, as we have put our guidance together.

Got it, okay. So that means the range that you've put out there does not basically, it just assumes flat reimbursement?

Correct, yes. There's really no pricing impact.

Tycho Peterson from JPMorgan.

First question on COLARIS, this is the last quarter I think before you anniversary the addition of PMS2. Can you just talk us through, are you still thinking that, that goes back to mid-teens growth going forward, or do you think there's a chance you could actually do a little bit better?

Yes, thanks, Tycho. This is the first, as you mentioned, this is the first quarter actually where we have comp out the impact of PMS2. So the growth rate we say this quarter, year-over-year of 26% really factors out that PMS2 impact. So you're right, that COLARIS growth in Q1 exceeded that mid-teens guidance we provided on the last call. We are encouraged about COLARIS and as we have increased overall guidance for the rest of the fiscal year, certainly with the first quarter's growth, you would expect that, that mid-teens is something that's certainly doable for the rest of this year. We'll have to see how the rest of the year plays out, but 26% in the first quarter was above our initial expectations.

And was there something specific that drove that? Was it the realignment of the sales force or something from your end that drove that?

I think there's a couple things. You mentioned, one, which is that now that we've put in the colon-focused specialist team in the Oncology segment. Clearly, that was responsible for some of that growth we saw over a doubling of sales in the colon specialist team quarter-over-quarter. So that was certainly part of that. Now that we've added two additional teams and as they get trained, we would expect their impact to probably -- that they would have some impact in last two quarters of the year. That was one of the reasons.

The other is, we've really been successful at just driving increased awareness and demand with physicians. I think, overall, colon cancer awareness clearly has been on the rise for the last few years. I think we've been able to drive some additional awareness, not only from the market perspective, but even with our physicians, as more and more physicians become comfortable with genetic testing in general. So that's the second component, is just overall increasing demand.

And the third thing is, we think we're successfully competing for market share in that segment. As you know, that's a segment that is not proprietary and so there are other laboratories that do testing. And we think we've been successful at competing for some of that other share. We believe we're the market leader with over 70% share, but we continue to believe that we gain some share because of the benefits that we offer with customer service, turnaround time, and the highest sensitive test on the market.

And then (multiple speakers) --

All of these, as you'll note will continue into future quarters. So there was nothing unusual or special about this quarter.

And then on the regulatory front, can you just talk to what you're expecting out of [LDT] regulations?

Yes, I think obviously the activity around laboratory-developed tests regulation has waned in the past year or so. I think as the FDA asks for public comments, it probably, the level of comments and the complexity probably exceeded their initial expectations. So I know the FDA has continually thought about what is the most appropriate way to potentially have additional regulation around LDTs. What we do know is that there was legislation passed that would require the FDA to provide six months notice before they were to publish even what would be considered draft guidance around laboratory-developed test regulations.

So we will have at least a six-month window before any LDT guidance would be issued. As we look at their work products for their fiscal 2013, it was not necessarily clear that laboratory-developed tests would be one of those work products. So it's an area we continue to monitor, but it is certainly one that is quite complex and I know the FDA has really tried to sort out all of the various comments they have had and figure out how to regulate, if they are going to regulate in a way other than what they have historically.

Mr. Evans, it appears we have no further questions at this time, sir. I will turn the call back to you for your closing remarks.

Great. Thank you very much. Thanks, everyone, for your participation on the call today. This does conclude our earnings call. A replay will be available via webcast on our website for a week. Thank you again for joining us and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation. Have a great evening, everyone.